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British pound surprisingly weak in 2013, today's reaction to inflation data unwarranted

The British pound sterling (Currency:GBP) has been punished by currency markets in the wake of today's inflation data. A look at the spot exchange rates at 12:25 in London shows:

  • The pound euro exchange rate is half a percent down on Monday's close; GBP-EUR is now at 1.1505.
  • The pound US dollar exchange rate is flat at 1.5099.
  • The pound Australian dollar exchange rate is 1.3 pct down at 1.6385.

Please be aware that the above quotes are taken from the wholesale markets - your bank will affix its own discretionary spread to the numbers. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering you more currency. Please learn more here.

GBP is too cheap, markets are digesting inflation data incorrectly

BMO Capital Markets and their analyst Stephen Gallo are always on our radar for the unique, and indeed sensible, views on the currency markets.

Sterling has been punished following today's inflation data, Gallo has the following response:  

"The very small downside miss in UK June inflation reported this morning probably didn’t warrant even a knee-jerk reaction in the GBP on the basis of fundamentals alone, but we suspect market participants continue to adjust their overall GBP exposures in front of the July minutes due for release tomorrow, which admittedly could cause some volatility.  

pound exchange rates

"In our opinion, the GBP really should not be a sell (buy) on lower (higher) inflation readings, since falling inflation, amongst other things, supports real income growth and should therefore be a benefit to a small, open economy like the UK’s. Realistically though, it’s perhaps close to impossible to force FX participants to change the nature of the way they trade economic data for a major, highly developed economy.  

"Our base-case scenario then is that further above-target CPI strength in the UK will more likely affect the medium-term value of the GBP, just as a weaker external position and relatively fast inflation rates have forced the GBP to remain surprisingly weak in 2013."

Does this viewpoint make sense? Should we pick up sterling on the cheap? What are other traders doing? Find out on the world's largest social trading setup - copy and follow the proven winners. Find out more.

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